Employment contract or something else: which contract should I use to hire someone?

When you start a new business, you will invariably decide that you need help.

But there’s always that question as to what type of help you need.

What is best for your business?

Deciding what is best…

Here’s where you should start.

Ask yourself what type of help you need.

Is it full-time help, part-time help or casual?

Do you need to take them on as an employee (and all that entails), or can you work with an agency or a contractor?

Like everything in life, you have a choice.

And here’s how we see it.

Your 3 main options are:

1. an employee
2. a self-employed contractor
3. what’s called ‘a worker’.

You can find the key differences between these 3 options explained in greater detail in our guide to the different types of help (coming soon)

Let’s delve a little deeper, shall we.

You’ll need an employment contract if you’re hiring an employee…

So, we’ve got several employment contracts for you to choose from, depending on what your employee is going to be doing.

You can get access to all of these templates below, all of which are suitable for employees only.

Simply click on the one that best suits your needs and ‘voila’ you’ve got your contract sorted.

• Employment contract that’s appropriate for most staff working for you
• Employment contract suitable for managers and more senior roles
• Employment contract for directors

An employee is an employee, even if it’s not in writing…

If you have an employee, then by law, they’re actually already employed under a contract of employment, whether you’ve put anything in writing yet or not.

This relationship is always ‘implied’, even if a written contract doesn’t exist.

Dare we say it’s very naughty not to have a contract of employment in place.

Get it done, so there’s no ambiguity about the basis on which you and the employee work together.

First-timer?

If you’re hiring for the first time, take a look at our step-by-step guide to hiring your first employee , containing all the practical, as well as legal steps, key documentation and things to think about.

It’s your no-nonsense recipe for a great hiring process.

You should also download our Employment guide which covers everything you need to know about your obligations as an employer

Not a first-timer?

Then our guide to hiring your next employee (coming soon) will have you covered.

What’s inside our templates?

Our contract templates include all the terms you need from more obvious ones like salary, hours, and holiday entitlement, to how the employee will be expected to manage confidential information, what would happen if they were off sick for a prolonged period of time, of if they make a complaint.

How to choose between them

The key differences between the first employment contract template and the more senior one is that the latter will be a bit longer and contain more detail, typically around:

• benefits, rewards and incentives
• duties and responsibilities (e.g. they’ll probably be responsible for managing other people); and
• restrictions that kick in when they want to leave (restrictive covenants)

…since they may be in a stronger position to persuade other members of staff to leave your business and follow them.

They may also know more confidential and competitively sensitive information about your business that could benefit a competitor or help that employee to become a competitor, so you want to nail that down straight away.

If you’re interested in finding out more about restrictive covenants our guide about restrictive covenants tells you all you need to know.

Directors and non-executive directors

Directors are also employees.

Non-executive directors are not.

Every limited company must have at least 1 director. (You do not have to have a non-executive director.)

Fixed-term employees

Fixed term employees have the same legal rights as permanent employees.

After 2 years, they may attain the same rights of redundancy as a permanent employee.

And after 4 years, a fixed term employee may automatically become a permanent employee.

If you’re hiring a self-employed contractor, you’ll need a different type of contract …

That’s because this is a different type of relationship altogether.

Again, there are a couple of choices here, depending on how the self-employed contractor has chosen to run their business.

For those running their businesses as a sole trader:

Contract for services: individual contractor or consultant operating as a sole trader

For those running their business as a limited company consultancy:

Contract for services: individual running their business as a limited company

What’s the difference and should you care?

You definitely should care – not least because getting the wrong arrangements can lead to legal and tax liabilities for both you and the freelancer/contractor concerned – a bit more on that in a moment.

The difference

The key difference between these two arrangements is that a sole trader business is one and the same with the individual who set up the business.

The business has no separate legal identity.

That individual’s income, debts, liabilities and responsibilities are entwined with that of their business.

Sole traders pay income tax on all that they earn, in the usual way – there are few tax reliefs available for sole traders.

And if something goes wrong, the sole trader’s personal assets could be clawed in to pay off debts or other claims, if the business cannot afford to pay any costs involved.

By contrast…

A limited company is a model where the limited company has its own legal identity, separate from its owner/founder(s).

Any risks or claims experienced by the limited company business is ring-fenced, meaning that the owner-founder has a much greater level of protection in the event of financial problems arising and their personal assets are not at risk (provided they have acted with integrity and lawfully).

They have greater tax benefits and they can raise money in multiple ways. Often making them a business partner who appears more stable, when it comes to pitches for work.

To find out more information on the differences between these two arrangements our guide about which business model to choose could come in handy.

Contractors are not employees.

Never treat them the same way as employees.

They are self-employed and should be considered as such.

Both on paper, and in practice, a contractor must never cross the line between self-employed and employed status.

If they do, they acquire the legal rights, such as holiday and sick pay and other rights that belong to employees.

There are various things you need to watch out for to ensure this situation doesn’t arise.

Our guide essential facts affecting freelancers and contractors (coming soon) provides some really helpful background on why and how you need to ensure you keep your contractors at arms-length.

Then, there are workers …

And these individuals are a sort of ‘halfway house’ between an employee and a self-employed contractor.

Someone might be a worker if, for example, they have a contract with an agency rather than the company they actually work for.

Temps and outsourced workers

A lot of temp staff and outsourcing businesses deploy this model, making the individuals who work on-site at a particular business, a worker for, but not an employee of, that client business.

The contract governing the relationship between the agency and the customer business wanting the ‘manpower’, is more likely to be a

contract for services to another business

Or it might even be a straightforward terms and conditions for the supply of services to another business arrangement, if the supply is a relatively fixed and not really negotiated or not high-value arrangement.

And finally, you may want to consider these other types of help …

Let’s take a look at what other types of help may be available.

Non-Executive Directors (NEDs)

These are board-level directors, who aren’t employees or involved in the day to day running of the business.

They’re generally appointed on the basis of their having invaluable specialist knowledge, contacts and/or they’ve made investments in the business.

They can wield a lot of influence and will typically have access to highly sensitive business data, including strategic plans and financial models, so put in place a proper NED agreement, to manage expectations and protect your business’ interests.

You may well need to pay PAYE and Social Insurance contributions on any fees that you pay to them.

If you don’t pay the tax and social contributions under PAYE, the NED will need to take responsibility for this.

Non-executive director appointment agreement (coming soon)

If you’re considering board appointments and who you might need on your board, our guide covering who you should have on your board will be helpful.

Advisers rather than non-executive directors?

Advisers are not directors of a company and while they may be retained to advise the board of a company on a project or in relation to certain specialist areas, they are not members of the board.

These individuals are suppliers of advisory or consultancy services that your business values.

They might contract with you on the basis of their own terms and conditions – which will almost certainly be the case if they are suppliers of professional services.

Professional advisers have their own regulatory and indemnity interests to protect and it’s generally standard practice for them to contract using their own terms docs.

Sometimes, however, a simple appointment agreement will suffice for advisers, such as the one below.

Agreement to appoint an adviser (coming soon)

Agents

If your business sells products, you can use an agency or distribution agreement to sell what you supply.

Both are quick and powerful ways to boost sales and exploit new markets.

Take a look at our guide about agency and distribution which explains the differences between an agency and distribution arrangement, the advantages of each model, and how they work in practice.

And our templates for each arrangement are here: template for an agency agreement and template for a distribution agreement.